Stephen Williamson
Senior Vice President and Chief Financial Officer at Thermo Fisher Scientific
Thanks, Mark, and good morning, everyone. I'll take you through an overview of our second quarter results for the total company, then provide color on our four business segments, and I'll conclude by providing our updated 2024 guidance.
Before I get into the details of our financial performance, let me provide you with a high-level view on how the second quarter played out versus our expectations at the time of our last earnings call. As Marc mentioned, in the quarter, market conditions were as we'd expected, yet another quarter of excellent execution, and this enabled us to deliver Q2 financials ahead of what we'd assumed in our prior guidance.
Starting with the top line. Core organic revenue growth was a little over 0.5 percentage point ahead of what we'd assumed in the prior guide for Q2. That translates to approximately $60 million of revenue, which is partially offset by slightly higher FX revenue headwind.
Turning to the bottom line. Adjusted EPS was $0.25 ahead of what we'd assumed in the prior guide for Q2. $0.08 was from strong operational performance, $0.06 was from favorable FX and timing of discrete tax planning benefits within the year and $0.11 was from the beat -- was from lower net interest expense. In my prior guidance, I took a prudent approach to the Olink transaction from a financing cost standpoint. We're also executing well on free cash flow generation. Year to date, free cash flow is 68% higher than the same period last year. So we're continuing to deliver strong performance and we're well positioned at the halfway point of the year.
Let me now provide you with some additional details on Q2, beginning with the earnings per share. In the quarter, adjusted EPS grew by 4% to $5.37. GAAP EPS in the quarter was $4.04, up 15% from Q2 last year. On the top line, in Q2, reported revenue was 1% lower year over year. The components of our Q2 reported revenue change included 1% lower organic revenue, a 1% headwind from foreign exchange and a slight contribution from acquisitions. We delivered another strong sequential improvement in core organic revenue growth this quarter. And in Q2, core organic revenue growth rounded up to flat on a year-over-year basis. In the quarter, pandemic-related revenue was approximately $115 million. This was mainly from vaccines and therapies. This represents a 3% headwind to organic revenue growth.
Turning to our organic revenue performance by geography. In Q2, North America declined mid-single digits, Europe grew low-single digits and Asia Pacific grew mid-single digits, which includes China, which also grew mid-single digits. With respect to our operational performance, we delivered $2.3 billion of adjusted operating income in the quarter and adjusted operating margin was 22.3%, 10 basis points higher than Q2 last year and 30 basis points higher than Q1 2024. Total company adjusted gross margin in the quarter came in at 42.1%, 110 basis points higher than Q2 last year. In the quarter, we continued to deliver very strong productivity, reflecting our continued focus on cost management, as well as the carryover benefit from the cost actions put in place last year. This enabled us to more than offset the impact of low volumes while appropriately funding investments to further advance our industry leadership.
Moving on to the details of the P&L. Adjusted SG&A in the quarter was 16.6% of revenue. Total R&D expense was $340 million in Q2, reflecting our ongoing investments in high-impact innovation. R&D as a percent of our manufacturing revenue was 7.1% in the quarter. Looking at our results below the line, our Q2 net interest expense was $59 million, which is $89 million lower than Q2 2023 due to higher cash and investment balances. Our adjusted tax rate in the quarter was 10% and average diluted shares were 383 million in Q2, approximately 5 million lower year over year, driven by share repurchases, net of option dilution.
Turning to free cash flow and the balance sheet. Year to date, cash flow from operations was $3.2 billion. Year to date, free cash flow was $2.6 billion after investing $630 million of net capital expenditures. We ended the quarter with $8.8 billion in cash and short-term investments and $35.4 billion of total debt. Our leverage ratio at the end of the quarter was 3.3 times gross debt to adjusted EBITDA and 2.5 times on a net debt basis. Including my comments on our total company performance, adjusted ROIC was 11.8%, reflecting the strong returns on investment that we're generating across the company,
Now I'll provide some color on our performance of our four business segments, starting with Life Sciences Solutions. Q2 reported revenue in this segment declined 4% and organic revenue was 3% lower than the prior year quarter. Growth in this segment was led by a biosciences business that was more than offset by the impact of the pandemic. Q2 adjusted operating income for Life Sciences Solutions increased 6% and adjusted operating margin was 36.7%, up 350 basis points versus the prior year quarter. During Q2, we delivered exceptionally strong productivity, which was partially offset by unfavorable volume pull through. The team continues to do an excellent job to appropriately manage the cost base and deal with the unwind of the pandemic.
In the Analytical Instruments segment, reported revenue grew 2% and organic growth was 3% higher than the prior year quarter. We continue to deliver very strong growth in our electron microscopy business. In this segment, Q2 adjusted operating income increased 1% and adjusted operating margin was 24.6%, 10 basis points lower year over year. In the quarter, we delivered strong productivity, which is more than offset by unfavorable mix and strategic investments.
Turning to Specialty Diagnostics. In Q2, both reported and organic revenue were 1% higher than the prior year quarter. In Q2, we continued to see strong underlying growth in the core led by our transplant diagnostics and immunodiagnostics businesses, as well as in our healthcare market channel. Q2 adjusted operating income for Specialty Diagnostics increased 1% and adjusted operating margin was 26.7%, which is flat compared to Q2 2023. During the quarter, we delivered good productivity, which was offset by strategic investments.
And finally, in Laboratory Products and Biopharma Services segment, both reported revenue and organic growth decreased 1% in Q2 versus the prior year quarter. This is driven by the runoff of vaccines and therapies revenue. Growth in this segment in Q2 was led by a clinical research business. Q2 adjusted operating income declined 10% and adjusted operating margin was 12.9%, which is 120 basis points lower than Q2 2023, flat sequentially to Q1 2024. In the quarter, we delivered strong productivity, which is more than offset by unfavorable volume mix and strategic investments.
Turning now to guidance. As Marc outlined, given our strong performance in Q2, we're raising our 2024 full year guidance. We now expect revenue to be in the range of $42.4 billion to $43.3 billion and adjusted EPS to be in the range of $21.29 to $22.07. Improved revenue guidance does not change the core organic revenue growth rounding for the year, so we still continue to assume core organic revenue growth will be in the range of minus 1% to positive 1% for 2024, and we continue to assume that the market declines low-single digits this year. Our proven growth strategy and PPI Business System execution will enable us to continue to take share once again.
Our 2024 updated guidance range assumes an adjusted operating income margin between 22.5% and 22.8%, slightly higher than the prior guide. Our PPI Business System is continuing to enable excellent execution, manage costs appropriately and fund the right long-term investments to enable us to further advance our industry leadership. We now expect net interest costs to be in the range of $380 million to $400 million for the year and the raise to our adjusted EPS guidance range reflects $0.15 increase on the low end and a $0.05 increase on the high end, which results in increase in the midpoint by $0.10. So another strong quarter of execution enabling an increase in the guidance outlook for the year. We remain really well positioned to continue to deliver differentiated performance.
I thought it would be helpful to remind you of some of the key underlying assumptions behind the guide that remain unchanged from the previous guidance. In 2024, we're assuming just under $100 million of testing revenue and $300 million to $400 million of vaccines and therapies related revenue. In total, this represents a year-over-year headwind of $1.3 billion to $1.4 billion or 3% of revenue. We assume that FX will be roughly neutral year over year to both revenue and adjusted EPS, and we're assuming that the $0.03 FX adjusted EPS beat that we saw in Q2 is offset for the remainder of the year, leading to no change for the year as a whole for FX versus the prior guidance.
We continue to expect adjusted income tax rate will be 10.5% in 2024. And for the year, we're assuming between $1.3 billion and $1.5 billion of net capital expenditures and free cash flow in the range of $6.5 billion to $7 billion. In terms of capital deployments, we're assuming $3 billion of share buybacks, which were already completed in January. We expect to return approximately $600 million of capital to shareholders this year through dividends, and we deployed $3.1 billion to acquire Olink shortly after the Q2 close. Full year average diluted share count is assumed to be approximately 383 million shares.
Finally, I wanted to touch on quarterly phasing to help you with your modeling. Relative to the midpoint of the guide, I recommend modeling Q3 organic revenue growth 1% higher than we delivered in Q2. Also good to model core organic revenue growth in Q3 1% higher than we delivered in Q2. And in terms of adjusted EPS in Q2, I recommend modeling it to be just over 24% of the full year.
So to conclude, we continue to deliver on our commitments, and at the halfway point, we're in a great position to deliver differentiated performance for all our stakeholders in 2024.
With that, I'll turn the call back over to Raf.
